艾克爾 (AMKR) 2006 Q3 法說會逐字稿

Welcome to the Amkor Technology Incorporated third quarter earnings conference call.

This conference will last one hour. [OPERATOR INSTRUCTIONS] As a reminder this conference is being recorded Wednesday, November 8, of 2006.

At this time I'd like to turn the presentation over to James Kim, please go ahead, sir.

Thank you.

Good afternoon.

This is James Kim, Chairman and Chief Executive Officer of Amkor Technologies.

With me today is Ken Joyce, Chief Financial Officer.

Before we begin this call, I would like to remind you that any forward-looking statement made during the course of this conference call represents current view of management.

Prior to this conference call, our third quarter earnings release was filed with SEC on Form 8-K.

The earnings release together with our other SEC filings contain information on risk factors that could cause actual results to differ materially from our current expectations.

Our third quarter sales were record for Amkor and marked the first time that our quarterly sales exceeded $700 million.

Our performance reflected continued improvements in our product mix and progress in our strategic growth area including FlipChip, ChipScale and other advanced packages and test.

We remain focused on carefully managing capital expenditures, improving operational effectiveness, and generating free cash flow.

We also remain focused on leveraging our strong technology position which includes outstanding capabilities in led free wafer bumping, wafer level packaging, package unpackage, other 3D solution, ChipScale packaging, including micro lead frame and the modules for advanced applications requiring high level of silicon integrations.

In addition, our position as a member of the common platform technology should provide us with early access to advanced silicon as core developed by IBM, Samsung, and Chartered.

As technology embraces 65 nanometers and moves toward 45 and beyond, this kind of strategic relationship becomes important.

Over the past several quarters, we have seen considerable improvement in our financial performances.

We have consistently delivered gross margin at or above 24%.

We have reduced operating costs.

We have been highly disciplined with our capital investment and we have generated free cash flow for four consecutive quarters.

We are formally committed to supporting our customers and to maintaining a disciplined approach to our business, but we are not going to aggressively chase market share at the expense of undermining our business model.

I am proud of what we have accomplished, but I think we can do even better.

I believe we can further enhance our productivity and make better use of our invested capital to drive higher growth and operating margins.

This increased the move from end markets and customers.

Our business visibility is relatively poor.

Based on a survey of leading industry analysts, 2007 semiconductor industry revenue is currently forecast to grow anywhere from 5% to 11% with an average forecast of 9%.

Ultimately, industry growth in 2007 will depend on the direction of world GDP.

While the U.S. economies are slowing, higher growth rate in many emerging economies should provide some balance.

Historically, Amkor's revenue growth rate has been around 1.5 times that of the semiconductor industry.

So on the basis of industry analysts forecast and bearing a global recession, enforcing events or a change in growth trends, Amkor's revenue could grow between 10 and 15% in 2007.

I want to emphasize that Amkor is focusing on generating profitable growth, supporting our customers and managing our balance sheet.

Ultimately, we will decide how much of this potential market growth to participate in.

That decision will be determined by our expected returns on capital and our ability to generate free cash flow.

Put another way, by controlling our investment and growth rate, we will be able to control our free cash flow.

In my view, a growth rate of 10 to 15% is optimal.

Such a scenario does not require significant investment in working capital or capacity.

Since we have large existing base of production assets, it does provide opportunity to better align our production assets with our growth free cash flow.

For 2007, based on our growth outlook, we currently expect our capital expenditure to be around 300 to $350 million.

This is in keeping with our objective to maintain a profitable and sustainable business model.

Alternatively, if business conditions soften in 2007 and we are faced with a flat growth environment, then we will curtail CapEx.

We only need 75 to $100 million to maintain our infrastructure and some amount of additional CapEx will be firm out to support our customers new programs.

But overall, I believe that in a flat or declining environment, we should still have the ability to generate 200 to $250 million in free cash flow.

Looking ahead to 2008, semiconductor growth could accelerate, stimulated by Presidential elections in the United States, Olympics in China, and the pending conversion to digital TV in the U.S, our challenge and the challenge for our industry will be to responsibly accommodate this growth while avoiding the creation of a capacity similar to what the industry experienced in 2000 and 2004.

Ken Joyce will review our third quarter operating performance.

Ken?

Thank you, Jim.

Q3 was another record quarter for Amkor with 714 million in sales and 2.2 billion units shipped.

While units were up slightly, sales rose 4% sequentially as we continued to enrich our product mix with strong growth in FlipChip and ChipScale packages.

We continue to benefit from our strategic alliance with IBM and from IBM's position as a leading provider of silicon technology for the new gaming platforms.

FlipChip continues to be our fastest growing product line, thus far in 2006, revenue from FlipChip assembly has more than doubled since last year.

Our Singapore test operation, which was acquired in 2004, has enjoyed solid growth.

This operation which now supports more than a dozen customers has reached critical mass and is generating solid returns.

So far this year, revenue at this factory is more than double what it was last year.

Our new wafer bumping facility in Singapore is now operational and we are leveraging our ability to provide wafer bump, probe, and final test services to key strategic customers in this important market.

We have also completed the first phase buildout of our new assembly and test factory in Shanghai.

This is a large complex, nearly 1 million square feet in total.

We have facilitized 25% of the main manufacturing building with a combination of FlipChip and Wire Bond assembly lines.

We have also equipped portions of the other buildings with required infrastructure.

We achieved third quarter gross margin of 24.9%.

During the quarter, we commenced operations in our new Singapore wafer bump factory and our new assembly and test factory in Shanghai.

Fixed costs associated with these new operations will be absorbed as we build revenue over the next several quarters.

Third quarter SG&A expenses include approximately $10 million in professional fees and related expenses in connection with the special committees investigation of our historical stock option granting practices and related activities.

We currently expect to incur approximately 5 million in related fees in the fourth quarter.

Absent these costs, our third quarter SG&A expenses would have declined slightly from the second quarter of 2006.

Going forward, we remain committed to continuing our realignment of corporate and factory SG&A structure and activities so that we can achieve made in full savings.

Our capital additions are tracking to plan and we expect full year additions of approximately $300 million.

Looking ahead to 2007, we remain focused on continuing our disciplined approach to managing capital investments.

As Jim mentioned earlier, our financial performance has improved considerably.

Quarterly sales have risen from 418 million in the first quarter of 2005 to 714 million in the third quarter of 2006 or 71%.

We have achieved four consecutive quarters with gross margin at or above 24% and positive net income.

We have also achieved four consecutive quarters of positive free cash flow.

During the first nine months of 2006, we generated $381 million of cash flow from operations.

We used $252 million to pay for capital expenditures.

The remaining remaining $129 million of free cash flow was used to retire 132 million of convertible notes at maturity this past June.

We expect to retire an additional additional 142 million of convertible notes at maturity in March, 2007.

Here is a recap of our fourth quarter 2006 guidance contained in our earnings release today.

Sales should be down 3 to 5% from the third quarter of 2006.

Gross margin should be approximately 24%.

Net income should be in the range of $0.20 to $0.24 per share.

We will now open this call to questions.

Operator?

Thank you, sir. [OPERATOR INSTRUCTIONS] Our first question will come from Jeff Harlib with Lehman Brothers.

Can you talk a little bit about the pricing environment you see in Q4 with industry utilization down a little bit and also if you could talk about what you are seeing in your end markets, a number of wireless chip manufacturers have seen some softness.

This is Jim.

Yes, price has been fairly stable throughout the period, and also yes, we have seen slowness in communication sector.

Okay.

And just SG&A, can you talk a little bit about if you're looking to hold SG&A going forward?

I think on your last call you talked about some higher incentive and other costs relating to ERP system.

We have.

You're right on the last call we did talk about that.

We had some incentive bonuses that we had accrued.

We also incurred some cost in implementing a new ERP system worldwide that we're working on and we think we're going to reap significant benefits, but we are now committed to looking at our SG&A structure to see what other savings can be achieved and we will be pursuing that and we'll be reporting that to you on our subsequent calls.

Okay, thank you.

Thank you our next question comes from Dave Egan with Lehman Brothers.

Please go ahead.

Mr. Egan, if you're using speaker equipment you will need to lift the handset.

I'm sorry.

I had the mute on there.

So, I had a similar question, some similar questions to Jeff.

So, just if we assumed that that 10 to 15% growth rate is consistent and historically that does seem to bear out with what we've been seeing, if you were to think about that, in the past, you've talked about potentially raising your gross margin to, if I remember correctly, as high as 28%.

What kind of number do you think is a reasonable expectation there and then in terms of the G&A or the SG&A, how do you think we should be thinking about this?

Do you have much leverage?

Should it be able to stay fairly constant or should we think of this more as a percentage of sales?

Again, this is Jim.

First of all, on the gross margin side, last four quarters, the way we have achieved the gross margin was two areas where one of course better pricing and charging the raw materials increase and so on.

Yes.

The second aspect is really, we have been -- we are learning how to manage our CapEx.

In other words, how to increase the throughput with the existing capacity we have, and in fact we are expanding our capacity even with the same equipment because we are increasing our productivity and so that is the way we are going to keep focusing, and so I'm not going to give you a number but I'm very comfortable with promising that gross profit will improve.

With regard to SG&A, now, as Ken earlier said, we got tied up into this option thing and so on so we got it up a little bit but we're going to get back to that issue and continue to improve our SG&A, especially to a percentage to revenue, I think you're going to see improvement.

Okay, so the way that you would suggest to us we should think about it is to think that it may go up over time as revenues increase but as a percentage of sales, it should start to decline?

Absolutely, and I think for at least next year, I don't see why SG&A absolute amount should increase.

In fact anything I try to drive down.

Okay.

Let me just see if there's one more question.

In terms of the overall pattern of business for next year, historically, we've seen a moderate to sharp decline in the first quarter and then pick up through the year.

Based upon what you would see now and think now, do you have any reason to believe that the first quarter may see stronger business than normal say for because of MS Vista or something else?

Right now very difficult to project that far.

Really, that depends on what Christmas or holiday sales are going to be, what kind of inventory at the far end, there ore, it's really pure speculation in my opinion, and again, communication sector.

The way I see it, maybe they are already controlling the inventory, therefore we may not have a problem but it's pretty hard to say at this time but I'm hopeful that overall because of gaming and so on, it may not be as bad as everybody is worried about.

Thank you.

Our next question comes from Tim Arcuri with Citigroup.

Please go ahead.

Hi, guys.

Two things.

I guess first of all, Jim, you said wireless is being particularly strong in the September quarter.

If you listen, you sound a little bit more cautious into next year and if you look at some of the data points around wireless, certainly there are some signs of some inventory, certainly at the high end entering Q4 and Q1, so if you look at your exposure, I remember you saying you're about 25, 30% exposed to that vertical, so does your guidance take into account some of these recent data points surrounding some of the high end inventory out there?

Yes.

Are you talking Q4 guidance?

Yes.

Yes, absolutely that's all part of it.

Okay, and then I guess also, you didn't give this quarter revenue by-product type and also utilization, so maybe you can give us that?

No.

Tim, I believe we did give you by end markets.

It's in the press release.

Is that what you're--?

We gave you about, yes.

Utilizations in the press release at 81%.

End market distributions with communications 40%, consumer 31%, computing 17%, other 12%.

And then as a further break down as a sales, laminant packages were 49%, lead frame packages were 36%, and other was 5% in test ten.

Okay, and then I guess last thing, is there any outlook as the IBM situation with PS-3, some of the chips changing and in terms of who is actually making the sell chip.

Do you have any visibility in terms of what that might do to your IBM related revenue, i.e. IBM is controlled.

Who packages the sell up until now but if they aren't making it anymore, the control of who packages that could potentially change and you could lose out on some of that.

Is that the wrong way to think about that?

That's -- I don't have any feel for that, absolutely not.

We have a good relationship as far as I know, we are participating fully.

Thank you, sir.

Our next question comes from Peter Kim With Deutsche Bank.

Please go ahead.

Hi, thanks for taking my call.

The first question I had is relating to your utilization.

It looks like your utilization declined from 84% last quarter down to 81% this quarter on increasing revenues and I was wondering, what is, if this is occuring, why is there a demand for CapEx to increase?

Again, you notice our revenue is increasing, so utilization appears to be coming up but that again is subject to product mix, first of all, but as I told you earlier, our productivity of each equipment is improving significantly at this time, with a variety of methods we are using, throughput of the capital is increasing, that's how our investment in the last nine months we have almost some $240 million of investment.

That's why utilization is looks like down a little bit.

So can we expect that next year that CapEx could actually come down from current years?

Well, that's my goal.

Okay.

If I can follow-up on that and you say right now, your Chinese factory in China and in Singapore are finally coming into production now and that you're shifting the capacity from your higher cost regions into these lower cost regions.

When can we expect some of the fixed costs from the other higher cost regions to be taken out of the equation?

Currently, I have no plan for any closing down of factories because as I see newer packages keep coming.

We need those places to introduce newer packages, more difficult ones, but we are continuously looking at how to allocate our assets in such a way that where the lowest cost, I mean, those margins coming down, we are shifting them and we are successfully transforming this process.

We could add one other thing to that, Jim, is that to some extent, we treat our workforce in our factories, in our Asian factories as pretty much a fixed cost because it's not easy to lay them off and bring them back on.

That being said, during the third quarter, we did start a voluntary retirement program for some employees in a couple of our factories.

We continue to -- we're going to accelerate that again in Q4, so in a sense that is a reduction in the fixed cost in some of these higher cost countries that you're talking about as we move to China.

Very good point.

Thank you.

Thank you.

Our next question will come from Tom Diffely with Merrill Lynch.

Please go ahead.

Good afternoon.

Looking again at capital spending, if we assume that you get the 15% next year, does your rough guidance of 3 to 350 actually support 15% growth?

Absolutely.

I'm very confident.

Okay, well so I guess if we look at just the industry in general, a few years ago they were spending in excess of 20% on capital spending and with this guidance looks like you'll be closer to 10% next year.

Is this kind of a multiple quarter, reduction in capital spending or is this a long term multiple year-type spending level you think is supportable?

First of all, I think it's a product mix issue.

Yes.

But again, I think everybody is learning, not just us.

I have to give credit to all of our competitors that they are still doing the same thing I'm doing, we are doing, where the throughput increases out as equipment is increasing.

We are somehow finding as the time goes by.

Okay, seems like that definitely helps you in a near term basis but longer term that you do have to buy the new equipment.

Well, 300 million is not a small--.

No, that's a good point.

And then quickly, Ken, on the balance sheet, I notice there was a bit of a jump in the accrued expenses.

Could you just kind of go over what that is and why the jump ?

Sure.

Which one, the long term or the short-term?

I believe this was short-term.

Okay.

The short-term accrued is--.

I thought it was 142 million.

Oh, no, no.

Hold on one moment.

I have that here.

The accrued expenses, we have customer advance payments in there.

Yes.

Of about 16 million went in there.

Our payroll, accrued payroll went up in the quarter only because of the cutoff issue, and there's some accrued interest in there.

They are the major items in there, but the one item that's in there now that was not in there as of year-end is 16 million in customer advance payments.

Okay.

All right thank you.

Thank you.

Our next question will come from Chris Blansett with JP Morgan.

Hi, this is [Jenny Yeung] calling for Chris Blansett.

Can you talk a little bit about the trends in your other end markets in Q4 aside from communications?

Do you see any other areas picking up?

Consumer areas picking up, whereas communication is slowing down but consumers have been picking it up.

Will it pick it up enough to offset any weakness in communication?

Well, as you know, we say fourth quarter is down by 3 to 5%, so you analyze it.

Still, percentage wise, as we said in our press release, communication is about 40%.

I think consumer is 31% and computing is 17%, so computing used to be about 15 maybe going up a couple of points.

Okay, so computing may stay approximately flat in Q4?

Well, it went up a little bit, about 15 to 17% area.

Okay, and then do you have any stock comp expense in your numbers?

We do.

The compensation expense is under FAS 123R and it's $1 million approximately for the quarter.

Thank you.

Our next question will come from Eric Reubel with Miller Tabak Roberts.

Please go ahead.

Good evening, gentlemen.

Thanks for taking my call and congratulations on a good quarter.

Ken, can you give a little more color about how the shape of the business will move as more capacity goes into China next year?

Can you give us -- you mentioned that 25% of the facility is now facilitized.

How much do you see that growing in '07 and as we look at incremental gross margin, given the capacity utilization is still very high, past two quarters it's been running around 29%.

Is that the right range to be looking at or any guidance on how to think about incremental gross margin?

This is Jim, by the way.

Let me answer about China facility.

As you know, we have a strategy of slowly growing in China.

That's why we have a million square foot building we purchased.

Of that, we have now facilitized 25% which has considerable space available to expand at this time, so how fast we are going to transfer and how fast we grow really depends on our business outlook, but one, we are going to try to transfer some of the low margin from a high cost area.

That's how we try to improve it and the other really is some business we are encouraging our customers to continue to move into China, so we are trying to bring some new business there.

With respect to your question on incremental gross margin , it's been in the 45 to 50% range over the last two quarters which is pretty normal on once we can get our gross margin up above 20%, so I would think that as we move in, as sales trail-off a little bit as we have in our guidance here on Q4 , I think that number would be in the 35 to 40% range in terms of incremental gross margin.

Okay.

Thank you very much.

Our next question comes from Lance Vitanza with Concordia, please go ahead.

Thanks for taking the call.

Just a clarification.

Did you give full year '06 CapEx guidance at 300 million?

Yes, we did.

And then on the SG&A front, I heard the comment earlier but I'm just wondering if you could go into any kind of detail at all about where you expect the savings to be to the extent that you see any actual absolute dollar reduction in SG&A going forward.

Yes, I can comment on that.

As Jim indicated, over the past quarter, we have been quite busy with our stock option review which has taken almost all of my time and my staff for a number of months now, but with that behind us, we plan to look at SG&A very thoroughly, a large portion of that is obviously people related expenses.

We're looking at ways of leveraging that amongst our different factories.

We're looking at shared service-type of arrangements with respect to both our IT and accounting functions within the Company.

We're also looking to do a better job on legal, when I say better job, we've had an extraordinary amount of litigation over the last two years, so we're trying to do a better job on handling that, and just really looking, as you know, SG&A has a lot of different expenses in there, consulting fees, professional fees, all of those areas we're going to look at and try to bring those down, so hopefully on our next call, we can give you a better update as some of the specific targets that we're going to set.

That's helpful and just lastly, if you look at the stock, the valuation of the business on any of the metrics, whether it's PE or free cash flow yield or EBITDA multiple, you trade at such a significant discount to the rest of the semiconductor group.

Do you have any sense as to why that is and what you might be able to do to kind of get the valuation more in line with your peers?

Well, I guess we simply lost credibility from not just you but the public.

The only thing we can do is we have to perform consistently.

That's all.

Thanks.

Take more time.

Thank you.

Our next question comes from [Peter Platt with Senho Point].

Please go ahead.

Yes, thank you.

That was Senho Point.

Congratulations on a good quarter first.

I wanted to really ask, you painted a very reasonable but nonetheless optimistic picture for the cycle over the next several years, and I was wondering, what in your view, do you see going wrong and where do you see your gross margins being impacted by that and where do you see yourself trying to offset that, basically looking for if the semi cycle isn't as benign as the path that most industry analysts expect and is not as robust given your historical growth rate?

That's a very good question.

I was hoping you guys could give me guidance, but again, my base is based on world GDP.

I really think there's a well established relationship now between the world economy, GDP, as some threshold.

I think some say 3%, who knows, but somewhere there above, we could grow.

When it goes below that, there's a possibility of, you know, a decline, and only, I think right now, there are a couple of concerns, who knows what the U.S. fourth quarter GDP is going to be or next year's Q1 is going to be.

I think some economists are split, but overall, as long as U.S. economy can stay in my view at 2% or above, I feel comfortable that rest of the world economy will be able to sustain which INF is saying it's going to grow by some 4%, no, I believe the last time number I saw was in the 4.5% area, but as long as that kind of world economy can grow at that rate, I believe semiconductor has the ability to grow at about 10%, so that means we do have a potential to grow to 15, 20% but I really brought that down to 10, 15%.

Just a follow-up and I appreciate your time.

In terms of the pricing environment seems despite the utilization, despite inventories, seems relatively benign over the next several quarters but if we looked out again over the next several years, could you talk a little bit about how flexible, I know we spent a lot of time speaking about SG&A, can you speak a little bit about how much flexibility you do have in terms of your cost base here to offset any potential in pricing?

Again, I think how you achieve the gross margin, as you know, depends on the markets of price and power, and that the other is of course control the cost, but I believe because our industry is becoming more disciplined, I believe pricing environment has considerably improved in my opinion, and I don't know about others but for Amkor, my experience in the last 40 years shows when there's a downturn, this only goes for maybe two quarters is where you see.

No reason for a Company like us to go try to buy the share because we are in four or five companies dominate the market.

By lowering price, you don't get this revenue and I think a lot of competitors and us made a mistake in the past, tried to have kind of a price war, but I think we are becoming smarter in my view, so I don't anticipate that for as far as Amkor is concerned as long as I'm running this business, I'm not going to allow that to happen, so I'm very confident that pricing environment will not be that significant.

There are other ways to give customer service, maintaining the price, and of course, revenue could decrease because overall demand in case decreases, then we will be affected but that doesn't mean we have to just drop the price like a commodity market anymore.

And one more, let me add one more.

Next year, the reason I talked about 2008 is I really think, and everybody agrees 2008 could be a big year in terms of variety of reasons I gave you, Presidential election, China 's Olympics and perhaps the digital TV's and all of that coming, I'm more worried about 2008's bubble where everybody tries to satisfy the demand thereby increasing the capacity, so I'm saying, hey, I'm going to watch this very carefully and I'm not going to fall into that trap.

Thank you.

Our next question comes from Eric Toubin with Banc of America Securities.

Please go ahead.

Hi.

As Amkor and it's competitors maintain lower CapEx levels have you even IDM spending more than they have recently on their back end capacity?

No, I have not and not only that, but with a couple of large companies going private, I really don't think they are in a position to spend a lot of money, especially back in the area.

Let alone the front end.

Okay, and then Ken, just for Q4 free cash, any guidance there or year-end cash balance guidance?

Yes.

We're looking for around, it will be in the area of 240 to 250 by year-end.

Thanks.

Thank you.

Our next question will come from Sundar Vadarajan with Deutsche Bank.

Please go ahead.

Yes, a couple of questions.

One, could you give us the mix between fabless and IDM this quarter?

Yes, I think about 55/45 wasn't it?

I believe 55/45.

In other words, fabless is 55 and IDM 45 and again, I'm treating IDM as fabless, packageless.

Okay.

And another question on the balance sheet.

You talked about taking out some of these near term debt maturities with cash on the balance sheet, but you also have a second lien note that's currently callable and you guys had to kind of -- you did borrowing when Amkor was in a different position from a financial standpoint.

Right now these are callable.

Any thoughts on addressing them in the near term in terms of refinancing those notes and maybe reducing your interest cost there?

Well, clearly, it presents an opportunity for us, that's for sure, as we generate free cash flow.

There is, as you're aware, and I don't have the schedule in front of me, there's a premium on those to make an early prepayment, but that being said, as we go forward and we start to build the kind of free cash flow that we think we can with our forecast, we could opportunistically approach that because you're right.

The interest rate on that debt is LIBOR plus 450 so quite expensive right now.

All right thanks.

Thank you.

Our next question comes from Mark Bachman with Pacific Crest.

Please go ahead.

Hi, Jim.

Your prediction of 10 to 15% growth next year, can you kind of talk about what you see as normal seasonality or talk about seasonality in Q1 and how does your year ramp in order to get to that 10 to 15% growth?

My projection right now is inside is Q1 is going to be weak.

I'm not going to give you a number yet.

We assume that, but I think second half is going to be strong because again, IDP, 2000 is going to be anything that I think, they are going to start building this into the third and fourth quarter, so I'm assuming third and fourth quarter are going to be -- we going to reach new highs.

Okay, that would kind of assume then if you have a pretty weak Q1 then Q3 and Q4 would have to be up in the magnitude of somewhere around 15 to 20% each?

Well, again, I'm not going to try to go into a game of predicting that, no.

Okay.

You can do the math.

It just seems like you guys are -- this is probably one of the few quarters where something hasn't gone wrong, but now you've kind of set some expectations out there that seem to be maybe a little bit ahead of expectations right now.

Would you say that?

I don't know why you say Q3 was bad.

In my view I think--.

No, no, I said this quarter was actually very good.

This is one of the few quarters where something on the conference call hasn't been perceived as a negative.

I'm saying, very good results here but now we're out looking and now we have this bogey to look forward of 10 to 15% that when you actually work through the numbers quarter by quarter it would seem like you would need a huge hocky stick in the back half of the year to get there.

Again, I don't think I can -- I should not discuss that issue because we have to meet quarter by quarter.

All I've done is given you the next couple years of my view of where this sector can go.

That's all.

I didn't say that necessarily each quarter, but--.

Our next question comes from Tim Arcuri with Citigroup.

Please go ahead.

Hi.

This is just a quick follow-up.

Ken, can you give us again as revenue scales down here, my views a little bit different, I think than yours in terms of what's going to happen to revenue in the next six months, but again I've been wrong for six months now, so can you give us some idea of what margins are going to look like say at 650, 600, and down to like 550?

It depends -- the margin depends largely on what the mix is and a number of other things, but I don't have each of those numbers down but you're saying through -- I'd say if you're in the 700 range, we're at 714 this quarter and you saw we're roughly 25%.

If you take an incremental gross margin reduction in there and I don't know what that's going to be, but I don't think I'm prepared.

Maybe we could talk a little bit after this call, Tim, and I'll try to work through some of those numbers with you.

Well, how about this.

What's breakeven and what would gross margin be at that revenue level?

I think that the breakeven--.

Let me, this is Jim.

Again, I don't want CFO to answer that question because that depends on many variables, you know that.

I mean currently, if you look at our SG&A and interest cost, probably, I can guess, just about 500 to 550 million will be where the breakeven will be, again, but that depends on margins.

If you assume margin to be -- if that low then margin will not be 25%, so I have to change the margin to 20, 22% and running at $100 million of fixed cost, whatever the cost is, including interest rate, and then 500 million will be a good model to assume, but there are too many variables to make that kind of a discussion at this time.

And I'm not worried about that at the moment.

Thank you, our next question will come from Peter Kim with Deutsche Bank.

Please go ahead.

Yes, hi.

I just wanted to follow-up and ask about the [Tortara] issue.

I was wondering if you -- at any point do you anticipate taking a reserve for that legal matter?

It's too early to say if there's a reserve.

I mean the accounting rules are if it's estimable and probable you would set up a reserve and based on where we're at so far in the proceedings, it's certainly not estimable and it's certainly not probable in our mind, so no, there wouldn't be a reserve until those two conditions came about.

Do you have any idea on the timeline of this, how long you think this is going to drag out?

I've heard that we're starting the discovery stage now and I believe there's some arbitration proceedings that will begin in October of '07.

Okay, thank you.

Our next question comes from [Justin Lou Fasol Associates], please go ahead.

Hi.

The 10.5% senior subordinated notes are callable.

Do you anticipate calling those before maturity?

No, because there is still some senior notes out there that would prohibit you from calling those.

Okay, great.

Thanks.

They are subordinate to the senior notes.

Thank you.

Our next question comes from Eric Reubel with Miller Tabak Roberts.

Please go ahead.

I'm sorry, my follow-up was answered.

Thank you.

Our next question comes from Robert Hopper with UBS.

Please go ahead.

I guess I have a question back to the CapEx for a second.

This year within the 300 number that you've been talking about, I know you have discussed how some portion of that I think 50 million is coming along with customer orders or something that's secured by customers in a sense.

Within the 300 to 350 for next year, is there any assumption for a similar amount?

We'll be following the same procedure that we have used this year.

We have been very successful at it, we're going to stick to the policy, so my goal is to really share the risk with our customers for any investment we are making.

Okay.

And just one other question.

On the SG&A, I think your comments before were suggesting that your goal is to see SG&A decline in absolute dollar terms and I just want to make sure I understand that.

So if you think you're going to grow 10 to 15%, you believe you're going to be able to leverage all of your SG&A to a point that you don't have to add any additional heads or any additional costs for that?

I don't think so.

I think we are still looking for absolute dollar to decline.

How much, I cannot tell you, but we are going to look into it.

We are going to continue to reorganize things we haven't been able to continue to do last three months.

[OPERATOR INSTRUCTIONS] Our next question is from Tom Diffely with Merrill Lynch.

Please go ahead.

Yes, I was just wondering if you have any kind of a meaningful exposure to ATI and if the acquisition by AND affects that going forward.

ATI is our customer and as far as I know, merger within our core -- acquisition by AND is not going to effect us whatsoever.

Okay, thank you.

Thank you.

Management at this time we have no additional questions in the queue.

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Thank you very much.

Thank you.

Thank you.

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